Words Worth Reading

This month, in Words Worth Reading, we include an article about the decision for early retirement from the New York Times.  Early retirement is not just about having enough money. It is about what you will do with your time. Read the article here.

We were so encouraged to discover ‘The New Act’ – a new section of the Financial Times. It illustrates the need for thinking about Encore – the second half of life. Read their introduction into this new venture.

We hope to see you all at this year’s Encore Workshop!

 

When to retire from your retirement fund

-By Sunél Veldtman

 

Your retirement and the retirement of your money are separate events. You do not need to retire from your retirement fund at the same time as your own retirement, and you can retire from your fund before you retire.

When can I retire from my funds?

Age 55 is the time from which you can retire from your retirement fund. Whether you have access to your money, depends on the type of retirement fund you contribute to. If that fund is a condition of your employment at the time, you may not retire from that fund until you leave that job. You may then be contributing to a pension or provident fund and you will need to continue to contribute until you retire, resign or are retrenched.

However, if you are contributing to a retirement annuity, you may retire from your annuity any time from 55. There is a caveat! If you are still contributing to an old style annuity, one that you signed to keep contributing to for a fixed period, you may be liable for penalties and fees – and you might not be able to get out of it until the maturity date of your annuity.

Of course, if you are contributing to a more modern, flexible annuity, you can stop or change your contributions at any time. You can take a contribution holiday and start again when you need or want to. (As an aside, you can possibly change from those old annuities, sometimes without cost – to a more flexible, cost effective annuity. Talk to Foundation if you would like an analysis of your annuities.)

If you have a preservation fund – as a result of previous contributions to an employers’ fund – you may also retire from these funds at any time after 55 regardless of your employment.

What are your choices on retirement?

On retirement, you can draw a third of your pension, retirement annuity or pension preservation fund in cash. You can draw your entire provident fund in cash (although the government wants to change this). The first R500 0000 of your lump sum withdrawal, is tax-free. Thereafter, the Receiver will take their share according to a tax table. See below.

With the rest of your retirement funds, you must buy an annuity that should ideally give you a regular income stream for the rest of your life.

Why would you delay retiring from your retirement fund?

It is tempting to get your hands on a large lump sum at 55. Sometimes it is necessary to fund plans for another career or a new business. But, it’s important to mention: It is equally tempting for those financial advisers who earn (a fat) commission on selling products to try and convince you to buy an annuity after turning 55.

If you do not need the money, it is rarely advisable to retire from your retirement funds at an early age. The reason is simple: the power of compounding. The longer you can leave the funds to grow inside a retirement fund, tax free, the better. Let’s look at this graph as an example:

 

When you retire from your retirement funds, taxes will devour a large part of your savings. Since it is compulsory to buy a life annuity from which you will receive a taxable income or living annuity – you must draw at least 2.5% every year and you will pay tax on the income withdrawals.

In the graph above, we illustrate the difference in the capital value of a retirement fund between Person A who retires at age 55 and withdraws 2.5% per year but re-invests the funds (so the person is still working and living off a salary), and Person B who retires at age 65 and starts withdrawing then.

Of course, the tax on your lump sum will also diminish you savings immediately.

When does it make sense to retire early from retirement funds?

There are times when it makes sense to retire earlier from a retirement fund and it relates to accessing the lump sum. When your retirement assets are a large part of your assets, access to liquidity is sometimes a challenge. For example, if a family wants to increase their direct offshore exposure to protect their assets against political risk, they may choose to retire early from their retirement funds providing they can afford to.

When do I need to retire from my retirement funds?

There is no longer a compulsory retirement age. You can delay retirement from your retirement funds indefinately. That is, if you can afford to.

As of 1 March 2018, a person will be able to transfer a pension or provident fund to a retirement annuity once the member has reached retirement age (The Taxation Laws Amendment Act, 2017). There will be no tax consequence. The full value of the retirement interest will need to be transferred and can’t be staggered. Should you transfer the provident fund to a retirement annuity you will lose the liquidity benefit of withdrawing 100%.

It is likely that you will also be allowed to transfer your pension or provident fund to a preservation fund at retirement (waiting for formal announcement).

This makes sense if you have other income sources or accept another job after you have retired from your employer’s pension or provident fund.

Can I continue to contribute to a retirement annuity after I have retired?

You can now contribute to a retirement annuity after your retirement even if you no longer earn a salary. It makes sense if you earn more income than you need. You can deduct your contributions from your taxable income up to the 27.5% of your taxable income to a maximum of R350 000 per year.

Deciding when and how to retire from your retirement products can be complicated. It should not necessarily determine when and how you retire though. At Foundation, we help our clients through this minefield. We are also not commission driven – nor do we make money from advising you to buy a new product. This puts us in a place where we can help you through the process by offering advice that is in your best interests. We can show you the impact of your decisions to retire earlier or later through thorough analysis. You can therefore make better decisions for your future.

 

Foundation Family Wealth is an Authorised Financial Services Provider.

 

When is a spouse a legal spouse?

-By Michelle le Roux

 

The fiduciary world is fascinating.  The more you learn, the more you realise how little you know.

In the last year we’ve had a firm objective at Foundation to ensure that our clients are in contact with our estate planning specialists and have valid, updated wills. As we studied each one we came across some complicated wording (and technical bequests!), but we are fortunate that our law is very clear about the basic principles.

This month I’m going back to some of these basics and recapping what we know about the different types of marriages and marital regimes in our country. It’s first and foremost important to understand the legal definition of a spouse, because it has various legal implications – in particular on an individual’s estate.

What do you need to know about your own marriage?

Before we take a closer look at the legalities, are you able to answer “yes” to the following questions?

  • Do you know which Act (and the terms) you were married under?
  • Do you know which matrimonial regime or matrimonial property system you were married in?
  • If you are married Out of Community of Property, is the accrual system included and how are you keeping track of accruals?
  • Does your will take your marital regime into account?
  • If you have a long-term life partner, do you have a co-habitation agreement?

These questions are very important and impact the way we approach your financial planning as well as estate planning.

The different types of marriages

Before the Recognition of Customary Marriages Act came into effect in 1998, the only legal type of marriage in South Africa was one that was concluded in terms of the Marriage Act. Today (luckily) our legislation provides other options for more diverse needs.

A union between people is recognised as a marriage in South Africa if it is concluded in terms of the following Acts:

  • Marriage Act 25 of 1961. This is the old-fashioned way; simply put it’s a marriage between a man and woman.
  • Recognition of Customary Marriages Act 120 of 1998. This applies to marriages concluded in terms of customary law, and it is applicable to customary marriages that occurred both before and after 1998. It includes monogamous and polygamous marriages.
  • Civil Union Act 17 of 2006. This is similar to the Marriage Act in terms of a monogamous union. While it usually applies to a union of persons of the same sex, individuals of opposite sexes can also conclude a marriage in terms on this Act.
  • Traditional Muslim and Hindu marriages are not recognised in South Africa as a legal marriage, regardless of whether it is monogamous or polygamous. The Muslim Marriages Bill was drafted in 2011 but has not been enacted and as a consequence, Muslim spouses remain largely without legal recourse. The solution for these individuals would be to be married in terms of one of the above Acts, but this is usually not possible because of religious objections, or simply because of its polygamous nature.
  • Domestic partnerships, or long-term life partnerships, are also not considered as a marriage in the eyes of the law.

It is advisable that a co-habitation agreement is put in place for both a Muslim marriage and/or domestic partnership, stating the financial status for each partner, division of living expenses and property (owned jointly or separately), and what the couples wishes are in the event of death.

Marital regimes

The Matrimonial Property Act determines how parties in a legal marriage maintain control over their property and ultimately, their estates.

  • Community of Property (COP) – This is the default regime and applies unless an ante-nuptial contract is entered into before the start of the marriage. Each spouse owns half the undivided share of the communal estate, and consequently half the debt.
  • Out of Community of Property – Spouses sign an ante-nuptial agreement before the marriage. Each spouse owns and accumulates their own estate and is not entitled to the estate of the other.
  • Out of Community of Property (including the accrual system) – Spouses also sign an ante-nuptial agreement before the start of the marriage. In this case community of property is excluded so that each spouse keeps their pre-wedding assets, but the communal estate after the marriage is divided equally. Each spouse is also entitled to the growth of the assets excluded from the communal estate.

Which regime applies to which marriage type?

Marriages in terms of Marriage Act and Civil Union Act – Any one of the three different regimes may apply, but will be COP by default unless an ante-nuptial agreement is entered into beforehand.

Marriages in terms of Recognition of Customary Marriages Act – The parties do not have an option in terms of the applicable regime because the date of the marriage will determine the regime. A monogamous customary marriage will be COP regardless of when marriage was entered into. Thanks to a groundbreaking case in the Constitutional Court in November 2000, a polygamous customary marriage will be COP after Nov 2000, but Out of Community of Property before that date.

A note on the Maintenance of Surviving Spouses Act

Besides the Acts discussed above which set out marriage types and regimes, our law books also have a very important piece of weaponry in their arsenal called The Maintenance of Surviving Spouses Act.

This Act was enacted in 1990 to give a spouse a legal leg to stand on if he/she is negatively affected or disinherited by the wishes of the testator, or in the case where the testator dies intestate and there is no will.

It means that a surviving spouse may have a financial claim against a deceased estate in certain cases, particularly where the surviving spouse is unable to provide for his/her own maintenance needs.

The term “spouse” is used throughout the Act – so what about Muslim marriages and long term domestic partnerships? While this Act automatically applies to the legal marriage types discussed above, the good news is that in 2009 the Constitutional Court also made it applicable to all Muslim marriages as well as persons in a long-term domestic partnership. These individuals are by pure legal definition not “spouses”, but are able to enjoy some protection under this Act.

Of course, what constitutes a valid will, and how marital assets are divided on divorce or death are separate subjects entirely; we will have a look at these in the near future. In the meantime, please read through your will and make sure that is updated with your latest wishes. Get in touch with us if you need help in making amendments and we will put you in touch with our estate planning specialists.

 

Foundation Family Wealth is an Authorised Financial Services Provider.